A manifesto for the Age of Democratic Innovation

It is clear that the need for innovation has never been greater. As the world economy struggles to recover from the global financial crisis, governments are casting about for strategies to revive growth. They are also struggling to come up with solutions to difficult global challenges ranging from climate change and the threat of pandemics to the demographic and health burdens (think costly chronic diseases such as diabetes and heart disease) imposed by older, fatter, and sicker populations.

Accelerating the pace of innovation would certainly help countries deal with both problems. Because most of the output of rich countries now comes from nonmanufacturing sectors, where brain trumps brawn, boosting innovation offers a promising way to increase productivity and spur future growth. And even in traditional asset- and legacy-heavy industries such as manufacturing, the next chapter shows, investing in the knowledge component of those businesses can lead to a renaissance. Breakthrough technologies and disruptive business models, such as the spread in Africa of banking and medicine via mobile telephony, can make it much easier to tackle those thorny challenges.

Governments everywhere are now coming up with innovation policies they claim will boost national competitiveness and tackle environmental and other social goals. The U.S. government has bailed out GM and Chrysler, for example, and is throwing money at batteries, electric vehicles, and other energy technologies. Various European governments are following the example of their French counterpart, which is now subsidizing such “strategic” industries as toy making. Yes, really.

As that example suggests, a lot of things done in the name of innovation are simply a sham. Many of the national innovation strategies implemented in the wake of the financial crisis merely subsidize favored technologies or prop up uncompetitive national champions. In the worst cases, they are thinly disguised attempts at protectionism. Though dressed up in pro-market language, they are mostly a throwback to the failed industrial policies of the 1970s and 1980s.

These policies are far likelier to retard innovation than to spur it. That is because innovation is at heart a bottom-up process — a Schumpeterian dance of risk, failure, resilience, and reward that is foreign to all-knowing bureaucrats but second nature to entrepreneurs.

Greed not only is good but also can do great good — if, that is, there are clear incentives to tackle the wicked problems of society.

But first governments must step back a little. History shows that official attempts to pick technology winners, no matter how initially promising, usually end in tears. Three decades ago, the French government developed Minitel, a national communications network that allowed users to send messages, book train reservations, and so on. This was a popular invention, and for its time a clever one. The snag was that bureaucrats insisted on keeping this a closed system, even after it became clear to everyone else that the future belonged to open networks such as the Internet. Minitel inevitably proved a dead end, and France lost out in the global Internet race.

The United States has its embarrassments too. In the wake of the 1970s oil shocks, the Department of Energy decided to invest heavily in producing synthetic petroleum, to end the country’s addiction to foreign oil. Predictably, the project proved a costly flight of fancy: billions of dollars and many years were spent on this technology dead end, but not a single barrel of “syn-crude” ever reached the market.

The current version of that boondoggle is the enormously damaging subsidy given to corn ethanol. This pleases the politically powerful farm lobby, but this perverse policy has diverted corn from food markets (fueling food price hikes that have hurt the very poorest) while also harming the environment (since corn ethanol, unlike the virtuous Brazilian sugarcane variety, is not green).

These policies have failed because, despite the best intentions of central planners, top-down innovation does not work as well as the bottom-up variety. This is especially true in energy, according to a comprehensive review of energy innovation coauthored by Richard Newell, currently head of the U.S. Energy Information Administration. He points to the current boom in the shale gas industry, which is the most extraordinary development in American energy in decades, and notes that it was not predicted by government planners. Newell’s study shows that energy innovation is driven not by short-term bursts of government support but chiefly by bottom-up efforts and market forces. Indeed, the key to the shale breakthrough was not government subsidies for new technology but the clever and diligent application by market actors of existing technologies to new situations.

The top-down approach was always misguided, but it is absurdly out of place given the speed at which innovation happens today. Thanks to globalization and the rise of the information economy, new ideas move to market faster than ever before. This is in large part due to the shift from top-down innovation (of the sort made famous by AT&T’s Bell Laboratories and other secretive corporate silos) toward more open, networked, and user-driven models of innovation. Think, for example, of the iPod: the research behind it was done by firms the world over, but Apple has reaped huge rewards from its skills in design, marketing, and systems integration.

Innovation is truly a global enterprise today. Much of the value created by firms is in the form of intangibles such as knowledge networks and open business models. Yet most governments cling stubbornly to national industrial policies that offer perverse incentives for local firms to squander resources on parochial technologies and outmoded business models. That suggests that innovation works best when government does least.

However, that is not to say that governments should do nothing at all. On the contrary, there is an essential, but carefully circumscribed, role for the state in fostering innovation. Despite the recent downturn, governments must continue to invest in the handful of areas that fortify an economy’s capacity to innovate — and therefore, to grow more robustly — in the future.

For a start, only governments can ensure that the framework for innovation is sound. America’s success at maintaining the rule of law, encouraging risk capital, and applying pragmatic bankruptcy codes all played a role in the spectacular rise of Silicon Valley, for example. Governments should also encourage investment in what the OECD calls “knowledge-supporting infrastructure,” which ranges from smart electricity grids and broadband Internet networks to basic research and university education. That principle argues against massive cuts in education and infrastructure, for example.

It would be far better for cash-strapped governments to cut spending on entitlement programs than to slash vital investment in the enablers of long-term economic growth.

But investing in the innovation framework must not mean picking technology winners. A better approach is the use of externalities pricing for such problems as carbon pollution, as it sets a societal goal but allows market forces — and, yes, greed — to find the most efficient way to solve the problem. Another promising advance is the official use of incentive prizes. Aneesh Chopra, the White House’s chief technology officer, argues that new technologies and a new mind-set are enabling innovation in government itself. One example involves initiatives to put much previously inaccessible public information up on the Internet, which is democratizing government data. Another way government can help, he argues, is by pushing for common standards and transparency in such areas as electronic health records. He also argues that government must act as a catalyst for greater research collaboration among academic and private sector actors at the precompetitive level.

These efforts get an endorsement from an unexpected quarter: Craig Newmark, one of the true pioneers of the Web. He founded Craigslist.org, which is the online bulletin board used by countless millions to exchange goods and services.

The upstart used to throwing rocks at the establishment has, it turns out, been advising members of Congress and the Obama administration on openness, networking, and what bureaucrats like to call Government 2.0. Newmark believes Gov 2.0 can become a big deal: “By exposing data, by fixing a lot of business processes, by using the technologies of the private sector, a lot of things are being made to work in Washington, and no one is talking about it.” He is convinced that the tools of social media can be applied to civics, to rebuild what he calls “the immune system of democracy.” He believes these remarkably disruptive tools may even transform government and its relationship with civil society.

These efforts at openness are to be applauded. But, sad to say, most of what governments around the world do in the name of innovation does not resemble such efforts in the least. That is why the biggest boost governments can give to national competitiveness is to stop doing some things. The first thing is to end perverse policies that discourage collaboration outside one’s own firm or country. The tax credit offered by the U.S. government for corporate research is appropriately generous for work done inside a firm’s labs (and Congress should make this stop-and-go policy permanent) but stingy if that same work is done with, say, university researchers. In contrast, Canada’s tax law does not punish collaboration in this way.

The second thing is to stop creeping protectionism. International coordination of technical protocols can be a good thing: Europe’s embrace of the GSM standard helped its firms grab an early lead in mobile telephony, for example. However, there are worrying signs that some proposals for technology standards (for example, rules on smart grid protocols or electronic health records) are really covert attempts to produce rules favoring local technology firms. History shows that such efforts can lock local firms into dead-end technologies and leave them unable to compete globally.

The most important thing that countries must stop doing is closing their doors to immigration. Flexible labor markets are essential for a vibrant economy. Given the democratization and globalization of innovation seen in recent years, companies must be allowed to tap freely into the brainpower of billions of innovators-in-waiting worldwide if they are to remain competitive. Just as important, bright sparks from around the world must have the freedom to pursue their studies and professional ambitions, wherever in the world that may take them. Studies of innovation clusters in Israel, Taiwan, and South India have shown that the catalyst sparking the rise of those aspiring Silicon Valleys was the constant flow of talented researchers, entrepreneurs, and venture capitalists to and from the actual Silicon Valley (which owes its own success in part to immigration). Think brain circulation, not brain drain.

[The principle of] “knowledge-supporting infrastructure,” …argues against massive cuts in education and infrastructure…”. No, it should argue, instead, that America get rid of it’s navel-gazing union-education complex that sucks up financial resources like a black hole and rebuild it’s educational system from the ground up in a manner that will have defined and measurable goals and incentives for “success”.

It must become a true meritocracy both productive and efficient, attributes no one would suggest our present “system” has or will ever have in it’s present hideously expensive and fundamentally unaccountable form.

All immigration is NOT good. Countries ABSOLUTELY MUST close the doors to anyone and everyone from everywhere, most of whom are an undesired and unsupportable permanent financial burden.

That is an issue entirely separate from rolling out the welcome mat for “brain circulation” of those with proven skills or talent to improve and supplement “home grown” skills and talent. One size does NOT “fit all” circumstance.

It would be far better for cash-strapped governments to cut spending on entitlement programs than to slash vital investment in the enablers of long-term economic growth.

I always like how Vijay is able to communicate his thoughts in to writing. The fact that I tend to agree with him all the time may add to that.
The bailouts though spent more towards subsidizing failed state and local government policies; such as providing unnecessary jobs to family members of politicians, than favored technologies. I think hind sight being 20/20, government leaders would have had more time to analyze what bailing out GM would cost over the long haul. They now have two examples of their actions, GM and inactions, Ford.
GM will never pay back the money provided to them while Ford went through the process of reorganizing to survive.
GM was forced by the government to go to market with a piece of junk like the Volt while Ford never had such a restriction.
And Vijay, don’t fall prey to the lefts usurping of immigration control. NO ONE is suggesting “Closing” the door to immigration. IT IS ILLEGAL immigration people are sick and tired of. I only became aware of the issue back in the 1990’s from my friends who have immigrated to this country legally. They are more upset about todays situation than I am. They are aggravated that they went through the process and waited 10 years to become a citizen and others are permitted to waltz in here and then many go on the dole. They want them rounded up and sent back. I would just like them to control how many come in. The ones that have been here, as long as they are obeying the law, should be allowed to stay, but that is it.

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Apr 3, 2012

8:13 am UTC

[…] has never been greater,” my old Economist colleague (and friend) Vijay Vaitheeswaran writes in his new book Need, Speed, and Greed. It may be clear to Vijay, but it’s not at all to me: The need for […]